PA 315 Government Business Relations

California State University San Bernardino College of Business & Public Administration Monty Van Wart

Agenda
Historical background on government Models of government-business relations

Historical Background on Government

How Many Governments We Have?

88,000 governments!

Federal: 1 State: 50 County: over 3000 City: 20,000 Townships (largely in East): 16,500 Districts

School districts: 13,500 Special (purpose) districts (water, sewer, sanitation, fire protection, community college, library, conservation, etc.): 35,400

Two distinct intellectual traditions

Adam Smith The market-oriented tradition

Alexander Hamilton The active government tradition

Government lacks the qualities to manage a countrys economy successfully. Nonintervention by the state in economic matters is the wisest policy. Institutions should emphasize the advantages of freely operating markets.

It was associated with mercantilism which guided British policy toward colonial America Government should control all aspects of economic activity in order to increase the wealth, unity, and power of the state. Hamilton urged the national government to aid fledging industries by providing economic assistance and tariff protection.

Historical Development of Government

Later 1700s: Anti-government era 1800s: Modest government era 1900s: Big (positive) government era Later 1900s to early 2000s: Resurgence of market

See http://www.whitehouse.gov/omb/budget/fy2007/pdf/hist.pdf for historical data, especially tables 7.1 for debt, and 17.5 for government employment figures

1700s and 1800s

Later 1700s: Anti government

Started very small but has grown over time 0.8% of population worked for government Examples: National bank (20th century Federal Reserve)
http://www.ushistory.org/tour/tour_1bank.htm , http://www.federalreserve.gov/aboutthefed/default.htm

1800s: Modest government

Provision of infrastructure: postal, roads, ports, canals, levees, railroads (example #1, Erie Canal: http://www.canals.state.ny.us/index.html ;
example #2, railroads: http://www.cprr.org/Museum/Maps/ , http://en.wikipedia.org/wiki/Northern_Pacific_Railway )

Government contracts: building and repairing roads and bridges, army materiel (for example see http://www.dla.mil and go to Agency Briefing), protection (Government as purchaser) Nonetheless, still relatively defined and modest

1900s BIG Government: Expanded involvement in 20th century

2% worked for government; 8% of GDP Government as a safeguard against risk:

Insurance (social security, FDIC, savings and loan, flood, etc.); welfare, corporate loans and bailouts regulation of business and protection of public good (licensing, OSHA, FDA, SEC, zoning, building codes, etc.)
http://www.sec.gov/about/whatwedo.shtml

Government as regulator

Examples: http://www.osha.gov/as/opa/oshafacts.html ;

Government as social architect

Education Comprehensive plans, grants system National heritage: historical sites, parks, wildlife diversity
example: land grant universities http://www.sanbag.ca.gov/planning/subr_ctp-details.html

Government as increased service provider

Trash collection, utilities, Airports, trains

Later 1900s to early 2000s: Resurgence of Market

7% worked for government; 32% of GDP Resurgence of market model as preeminent model Reasons

Demise of USSR and Cold War, Slow conversion of China from communism and India from socialism, Sharp reduction of government services in Westminister countries New Zealand, Britain, Australia, etc.
Increase in global competition

*Well recited in The Commanding Heights by Yergin and Stanislaw (http://www.youtube.com/watch?v=Jqy0Gbo1DX8&mode=related&search=)

Evolving size and function of Government, cont.

State and local employment have continued to increase proportionally with population, currently 19,000,000 (total all gov=23m)

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The Rate of Growth of Government

Greatest during national emergencies Civil War WWI Great Depression (1929-1940) WWII (1941-1945) War on Terror? Economic booms In general, the 20th century was an age of government: Invention of the income tax (16th Amendment of 1913); Great Depression and WWII; Perceived successes of government Growth has slowed after 1978

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Evolving size and function of Government, cont.

Federal debt growth (see US National Debt Clock for up to the minute debt owed,
http://www.brillig.com/debt_clock/ ) (see the national GDP and last years debt ratio https://www.cia.gov/library/publications/the-world-factbook/)

Source: http://zfacts.com/p/318.html

What the Federal Government Does?

What California State Government Does?

Why the growth of government despite the historical preference for small government?
To placate interest groups over time Difficulties shrinking government after periods of government expansion More complex societies tend to need more government (Wagners law)

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Summary of governments roles interacting with and supporting business

Government as provider of monetary and fiscal structure Government as regulator Government as a safeguard against risk Government as provider of infrastructure Government as purchaser Government as social architect Government as service provider Government as promoter of business

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Are there proper roles for government?

What are the proper roles for government? The still more sophisticated question: to what degree and how should government play the various roles?

The answer is ultimately defined by society over time. Compare the dramatically different perspectives of social systems primarily defined by subsistence, heritage, religion, capital, social equity, military prowess, etc. In the American context,

the argument is generally discussed in terms of what is inherently governmental (a core government responsibility) and not inherently government (functions that may or may not be run by the government depending on the conditions and the will of society). Nongovernmental functions would include industry, commerce, private ownership, volunteerism, etc.
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Roles of Government: Inherently governmental

National defense and civil order (e.g., military and police) Maintenance of economy, e.g., fiscal and tax policy, regulation of markets and competition Core public interest activities (public goods such as parks and national treasures, public transportation, education, welfare, disasters, etc.) and civil liberties Regulation of

society for common good (laws prohibiting murder to trespassing to jay-walking) and business (laws prohibiting air pollution and requiring record keeping); especially for this class zoning and physical/environmental planning
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Roles of Government: Not inherently governmental

Non-core basic public services

(e.g., postal service, utilities, airline transportation security, garbage collection, insurance programs) not necessarily inherently governmental and meant to be relatively self-financing
from reducing blight in developed areas to maximizing new development in undeveloped lands

Support of economic development:

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Models of Government Business Relations

(Steiner & Steiner 2006)

Four Models of Government-Business

Market capitalism model (normative>descriptive) Dominance model (descriptive) Countervailing forces model (descriptive) Stakeholder model (normative>descriptive)

The Market Capitalism Model

Sociopolitical Environment Market Environment

Business

Business operates within a market environment, responding primarily to powerful economic forces and being sheltered from direct impact by social and political forces. Government interference in economic life is slight (laissez-faire) and undesirable.

The Market Capitalism Model

Conclusions about government business relationship:

Government regulation should be limited. Markets discipline private economic activity to promote social welfare. The proper measure of corporate performance is profit. The ethical duty of management is to promote the interests of shareholders.

* These tenets have shaped economic values in the industrialized

West and also increasingly elsewhere.

The Market Capitalism Model

Critics of the market capitalism model:

Capitalism creates prosperity at the cost of rising inequity. Markets erode virtue as it is increasingly energized by avarice, self-love, and ruthlessness. Markets place too much emphasis on money and material objects. Flaws, without correction, may reward conspiracies and monopoly lead to enormous painful swings of excessive consumption and economic depression. The profit motive has led companies to pollute and plunder the earth.

The Dominance Model

Environmental Forces

BusinessGovernment

Masses

Business and government dominate the great mass of people Corporations and a powerful elite control a system that enriches a few at the expense of the many Such a system is undemocratic
in addition to a description of how things are.

* The model does not represent an ideal

The Dominance Model

Proponents of the model focus on the defects and inefficiencies of capitalism that

Corporations are insulated from pressures holding them responsible Regulation by government to big business is feeble Market forces are inadequate to ensure ethical management

The ideal is to turn it upside down so that government business relationship conforms to democratic principles.
large trusts such as Standard Oil emerged, buying politicians, exploiting workers, monopolizing markets, and sharpening income inequality.

* The model gained a following during the latter half of the 19th century when

The Countervailing Forces Model

(Pluralist Model)
Environmental Catalysts
Economic conditions Markets War Ideology Technology Nature Culture change

The Public
Values Opinion Demands Supports

Corporations
Market operations Influence efforts Lobbying Leadership

Government
Statutes Regulations Political leadership Partisan behavior

Government business relationship is a flow of interactions among the major elements of society. It suggests complex exchanges of influence among them, attributing dominance to none. It differs from the market capitalism model by opening business directly to influence by nonmarket forces.

The Countervailing Forces Model

Overarching conclusions:

Business is deeply integrated into an open society and must respond to many forces, both economic and noneconomic. Business is a major initiator of change through its interaction with government. Broad public support of business depends on its adjustment to multiple social, political, and economic forces. Government business relationships continuously evolve as changes take place in the main ideas, institutions, and processes of society.

* The model reflects the government business relationship in

industrialized nations with democratic traditions.

The stakeholder model

Educational Institutions The Poor Media Competitors

Stockholders
Future Generations Suppliers

Corporation locates at the center of an array of mutual relationships with stakeholders:

Governments

Customers

Corporation
Earths Biosphere Trade Associations

Primary stakeholders have immediate, continuous, and powerful impact. Secondary stakeholders have less mutual immediacy, benefit, burden, or power to influence.

Religious Groups

Communities

Employees

Political Interest Groups

Political Parties

Creditors Unions

The model is an ethical theory of management , in which the welfare of each stakeholder must be considered as an end.

The stakeholder model

The model

Rejects the shareholder-centered view of the firm in the market capitalism model as too limited in focus and time Creates duties toward multiple constituents of the corporation Requires business management raise its gaze above short-term profits to see and respond to a spectrum of other values

* Many large corporations have adopted methods and processes to

analyze their stakeholders and engage them.

The stakeholder model

Critics to the stakeholder model

It is not a realistic assessment of power relationships between the corporation and other entities, as it seeks to give power to the powerless by replacing force with ethical duty, a timeless and often futile quest of moralists. It sets up too vague a guideline to substitute for the yardstick of profits for investors, without clear and objective measures to evaluate the combined ethical/economic performance of a firm. It is not clear who or what is a legitimate stakeholder, to what each stakeholder is entitled, or how managers should balance competing demands among a range of stakeholders.